HLBANK (FV RM12.54 - NEUTRAL) 9MFY12 Results Review: Cautious Growth

The group reported annualized 9MFY12 results that were largely in line with both consensus and our full-year forecasts. The group is poised to capitalize on longer-term growth opportunities  thanks to its larger post-merger organizational footprint. However, the slowing economic environment in the medium term and HLBank’s relatively conservative culture could cap any immediate-term revenue upside synergies, which is already reflected in its lower-than-expected loans and transactional fee income growth. Maintain NEUTRAL and FV of RM12.54 (2.0x FY12 P/BV, 15.1% ROE).

In line. HLBank’s annualized 9MFY12 earnings were largely in line with both consensus and our forecasts, representing 77.2% and 75.1% of the respective full-year estimates. Excluding the lumpy RM114.6m one-off VSS cost and RM2.6m initial integration cost recognized in 9MFY12, core earnings on a proforma comparison (i.e. assuming full contribution from EON Cap for 9MFY11 period) grew 13.6% y-o-y, largely attributed to a 85.5% y-o-y decline in provisions as a result of strong NPL recovery and well-managed NPLs. However, proforma core pre-provision operating profit declined 4.5% y-o-y, dragged down by:  (i) relatively lacklustre annualized loans growth of 5.5%, and  (ii) continued NIMs pressure from persistent yield pressure on mortgage loans and relatively stronger deposit vs loans growth. We have highlighted in our past reports that given the current economic downturn and HLBank’s relatively more conservative culture, the immediate-term revenue synergies  (via leveraging on its enhanced distribution network to drive growth) is likely to be capped and this is reflected in its lower-thanexpected loans growth. The strategy  of focusing on portfolio rebalancing by allowing a few of EONCap’s legacy lower credit quality lumpy SME loan portfolio to be gradually paid off rather than rolling them over had also contributed to a lag in overall loans growth.

Q-o-q performance boosted by more favorable capital markets. 3QFY12 net profit increased 21% q-o-q, largely due to the low base effect of 2Q12’s lumpy VSS cost of RM114.6m. Excluding the VSS cost, 3Q12 earnings declined 6% q-o-q due to strong loan recoveries in 2Q11  which  resulted in exceptional net write backs vs  3Q12’s more normalized credit charge-off rate of 11bps. Core pre-provision operating profit was up a commendable 2.3% q-o-q, despite a 22bps q-o-q contraction in NIMs that resulted in a 2.5% q-o-q contraction in net interest income, as lower unrealized losses from its financial derivative instruments helped raise overall net trading income by 72% q-o-q and consequently, overall non-interest income by 5.9% q-o-q. Transactional fee income declined 12.5% q-o-q, partially offsetting the benefits of higher overall trading income. Given the more unfavorable capital market conditions in 4Q12 (i.e. 2QCY12), there is a risk that non-interest income could contract sequentially.

Source: OSK